ACCT 240, CHP 9: FLEXIBLE BUDGETS AND PERFORMANCE ANALYSIS

FAVORABLE REVENUE VARIANCE

If actual revenue exceeds what the revenue should have been, the variance is labeled favorable; essentially if the average selling price is greater than expected.

UNFAVORABLE REVENUE VARIANCE

If actual revenue is less than what the revenue should have been, the variance is labeled unfavorable; essentially if the average selling price is less than expected

UNFAVORABLE SPENDING VARIANCE

If the actual cost is greater than what the cost should have been, the variance is labeled as unfavorable.

FAVORABLE SPENDING VARIANCE

If the actual cost is less than what the cost should have been, the variance is labeled as favorable.

PLANNING BUDGET

Prepared before the period begins and is valid for only the planned level of activity. Static budget.

FLEXIBLE BUDGET

An estimate of what revenues and costs should have been, given the actual level of activity for the period.

% CHANGE IN INCOME VS. % CHANGE IN ACTIVITY

Because of the existence of fixed costs, net operating income does not change in proportion to changes in the level of activity. The percentage changes in net operating income are ordinarily larger than the percentage increases in activity.

REVENUE FOR NONPROFITS

Due to revenue from endowments and donations, revenue for nonprofits may consist of both fixed and variable elements. Revenue = fixed donations/grants + price*quantity(product)

MANAGEMENT BY EXCEPTION

Management system that compares actual results to a budget so that significant deviations can be flagged as exceptions and investigated further.

REVENUE VARIANCE

The difference between actual total revenue and what the total revenue should have been, given the actual level of activity for the period.

SPENDING VARIANCE

The difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity.

VARIANCE ANALYSIS CYCLE

Used to evaluate and improve performance. Begins with the preparation of performance reports in accounting department (highlighting variances), variances are investigated, then next period's operations are carried out and cycle begins again.

ACTIVITY VARIANCES

Variances on a report due solely to the differences between the actual level of activity and the level of activity in the planning budget from the beginning of the period.